Covered Calls on Portfolio

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ryanshook
Posts: 18
Joined: Sun Apr 08, 2018 9:01 pm

Covered Calls on Portfolio

Post by ryanshook » Fri Jan 04, 2019 3:54 pm

Does anyone here sell covered calls on their long-term investments through Vanguard? I am in a lower tax bracket so selling covered calls looks like a decent way to produce some income on long-term holdings but I do not have much experience selling options. Any resources or advice is appreciated.

Thesaints
Posts: 1718
Joined: Tue Jun 20, 2017 12:25 am

Re: Covered Calls on Portfolio

Post by Thesaints » Fri Jan 04, 2019 4:09 pm

ryanshook wrote:
Fri Jan 04, 2019 3:54 pm
Does anyone here sell covered calls on their long-term investments through Vanguard? I am in a lower tax bracket so selling covered calls looks like a decent way to produce some income on long-term holdings but I do not have much experience selling options. Any resources or advice is appreciated.
Get a lot of background info before even trying. Let's say, until you are able to open McMillan on a random page and understand right off the bat what is written there consider yourself "green".

BTW, if you write calls on your stock investments, you are effectively buying some downside protection. Since buying always costs money, your expected return will be reduced in excess of the options premium you cash. This even before considering that unrealized gains on stocks are tax deferred and eventually taxed at long term capital gains rate, while option premiums are taxed every year at your marginal rate.
Last edited by Thesaints on Fri Jan 04, 2019 4:24 pm, edited 1 time in total.

livesoft
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Re: Covered Calls on Portfolio

Post by livesoft » Fri Jan 04, 2019 4:21 pm

Many years ago, I used to sell covered calls. I had a computer program to help identify trades that met a specific criteria.

The lesson is: There Ain't No Such Thing As A Free Lunch (aka TANSTAAFL).

In general, no one is going to mis-price an option that they buy from you or sell to you. Many options have zero trading volume because there is no way to make money with that particular strike price, expiration date, and current price of the underlying investment.

My last 4 options trades all made me money. That was enough to decide that I should not be doing that.

So I suggest you try it as an exercise in your decision making and see what it is like from a personal level and to satisfy your curiosity. As far as hobbies go, it probably would cost you less than horseback riding.
Last edited by livesoft on Fri Jan 04, 2019 4:23 pm, edited 1 time in total.
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DrGoogle2017
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Joined: Mon Aug 14, 2017 12:31 pm

Re: Covered Calls on Portfolio

Post by DrGoogle2017 » Fri Jan 04, 2019 4:23 pm

I never have much luck with covered calls. I don’t quite have the patience.

Shallowpockets
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Re: Covered Calls on Portfolio

Post by Shallowpockets » Fri Jan 04, 2019 4:34 pm

How much do you see yourself making on covered calls (CC)? I trade calls throughout the year. To make any real money you would have to use maybe 50K of your assets. No sense in CC on a $10 stock. Unless you buy 10-40K of that stock. You have to buy enough of a low price or less of a high price stock. And you want the movers. An option is on 100 shares, which is one contract. So you need increments of 100 shares.

Look at NFLX, AMZN, tech stocks costing over $100 a share. For the 100 shares (1 options contract) you would need 10K. I would say that would be your minimum. Unless you would be satisfied doing all that work for a small options premium.
At first you will need a level II broker account to see real time quotes on stocks and options. You need to look at some of this before you buy and get a feel for the markets in whatever stock you prefer.
I prefer weekly options so I know the price movement for that week, sometimes selling on Thursday or Friday. I like to get my money sooner. I prefer also to have a strike price high enough (but lucrative enough) to not be exercised.

inbox788
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Re: Covered Calls on Portfolio

Post by inbox788 » Fri Jan 11, 2019 2:58 am

ryanshook wrote:
Fri Jan 04, 2019 3:54 pm
Does anyone here sell covered calls on their long-term investments through Vanguard? I am in a lower tax bracket so selling covered calls looks like a decent way to produce some income on long-term holdings but I do not have much experience selling options. Any resources or advice is appreciated.
You can pick up nickles in front of a steamroller all day long selling far out of the money calls.

I'm trading options, but don't recommend you do it without really understand all the ramifications. It took me quite a while to figure out some things out and I'm still no expert. And you can bet there are real experts out there you're going up against. You know what they say about looking around the poker table for the sucker/patsy.

msk
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Re: Covered Calls on Portfolio

Post by msk » Fri Jan 11, 2019 4:51 am

Just go in small and build up from there. I did it for years quite profitably but it takes patience and you get tense because stock prices do not rise or fall monotonically. They always yoyo. So, now that I am in my mid 70s I decided to stop. My typical trades went as follows:

Buy $1 million $ of SPY. You can use any ETF that represents the SP500.
Wait until you "feel" that the recent market rise is overdone, like at mid 2018 when you were rubbing your hands with glee. SPY was around 290 (SP500 @ 2900)
Sell enough Call contracts to represent your holdings of SPY with a Strike Price of 290 maturing mid 2019. Collect around $50k cash
Wait and be patient! SPY went higher and you get nervous that you had bet wrong. Patience! If by mid 2019 SPY was even one cent below 290 you smile. The $50k is yours to keep, together with all the dividends from your million $ in SPY. Even if SPY was above 290 at mid 2019, you still pocket the $50k and the dividends (say, a total of $65k) but lose the upside beyond 290. You NEVER lose your million $ of SPY. It just gets sold and you receive a million $ cash (+the $65k of course).

If you wish to play, start small, say, using $100k of SPY as base. Once you get the hang of it over a few years you may play with your entire portfolio. You NEVER lose the portfolio capital, just the upside less $65k. I.e. many of us would be happy to make $65k (6.5%) annually from a million $ portfolio. If you are one of these, play as per above. If you feel that you are looking for >>6.5% do not play with covered Calls. There are other ways, but of course, you run greater risks. But as you become familiar with options you also learn how to mitigate those risks.

msk
Posts: 992
Joined: Mon Aug 15, 2016 10:40 am

Re: Covered Calls on Portfolio

Post by msk » Fri Jan 11, 2019 4:57 am

Books:
Options Made Easy by Guy Cohen
The Bible of Options Strategies by Guy Cohen
Have fun but do NOT get too greedy. You can lose your shirt overnight...

inbox788
Posts: 5761
Joined: Thu Mar 15, 2012 5:24 pm

Re: Covered Calls on Portfolio

Post by inbox788 » Fri Jan 11, 2019 12:11 pm

msk wrote:
Fri Jan 11, 2019 4:51 am
Just go in small and build up from there. I did it for years quite profitably but it takes patience and you get tense because stock prices do not rise or fall monotonically. They always yoyo. So, now that I am in my mid 70s I decided to stop. My typical trades went as follows:

Buy $1 million $ of SPY. You can use any ETF that represents the SP500.
Wait until you "feel" that the recent market rise is overdone, like at mid 2018 when you were rubbing your hands with glee. SPY was around 290 (SP500 @ 2900)
Sell enough Call contracts to represent your holdings of SPY with a Strike Price of 290 maturing mid 2019. Collect around $50k cash
Wait and be patient! SPY went higher and you get nervous that you had bet wrong. Patience! If by mid 2019 SPY was even one cent below 290 you smile. The $50k is yours to keep, together with all the dividends from your million $ in SPY. Even if SPY was above 290 at mid 2019, you still pocket the $50k and the dividends (say, a total of $65k) but lose the upside beyond 290. You NEVER lose your million $ of SPY. It just gets sold and you receive a million $ cash (+the $65k of course).

If you wish to play, start small, say, using $100k of SPY as base. Once you get the hang of it over a few years you may play with your entire portfolio. You NEVER lose the portfolio capital, just the upside less $65k. I.e. many of us would be happy to make $65k (6.5%) annually from a million $ portfolio. If you are one of these, play as per above. If you feel that you are looking for >>6.5% do not play with covered Calls. There are other ways, but of course, you run greater risks. But as you become familiar with options you also learn how to mitigate those risks.
I don't know where to begin...I'l just ask, where did you get 6.5%? What I see is SPY to 290 is a 12.5% gain and June '19 SPY 290 Call is 1.33.

Walkure
Posts: 68
Joined: Tue Apr 11, 2017 9:59 pm

Re: Covered Calls on Portfolio

Post by Walkure » Fri Jan 11, 2019 12:33 pm

inbox788 wrote:
Fri Jan 11, 2019 12:11 pm
msk wrote:
Fri Jan 11, 2019 4:51 am
Just go in small and build up from there. I did it for years quite profitably but it takes patience and you get tense because stock prices do not rise or fall monotonically. They always yoyo. So, now that I am in my mid 70s I decided to stop. My typical trades went as follows:

Buy $1 million $ of SPY. You can use any ETF that represents the SP500.
Wait until you "feel" that the recent market rise is overdone, like at mid 2018 when you were rubbing your hands with glee. SPY was around 290 (SP500 @ 2900)
Sell enough Call contracts to represent your holdings of SPY with a Strike Price of 290 maturing mid 2019. Collect around $50k cash
Wait and be patient! SPY went higher and you get nervous that you had bet wrong. Patience! If by mid 2019 SPY was even one cent below 290 you smile. The $50k is yours to keep, together with all the dividends from your million $ in SPY. Even if SPY was above 290 at mid 2019, you still pocket the $50k and the dividends (say, a total of $65k) but lose the upside beyond 290. You NEVER lose your million $ of SPY. It just gets sold and you receive a million $ cash (+the $65k of course).

If you wish to play, start small, say, using $100k of SPY as base. Once you get the hang of it over a few years you may play with your entire portfolio. You NEVER lose the portfolio capital, just the upside less $65k. I.e. many of us would be happy to make $65k (6.5%) annually from a million $ portfolio. If you are one of these, play as per above. If you feel that you are looking for >>6.5% do not play with covered Calls. There are other ways, but of course, you run greater risks. But as you become familiar with options you also learn how to mitigate those risks.
I don't know where to begin...I'l just ask, where did you get 6.5%? What I see is SPY to 290 is a 12.5% gain and June '19 SPY 290 Call is 1.33.
His 6.5% is a conflation of an estimate of the difference in return using that strategy, plus the dividends he would have collected anyway. It does not include the capital loss on the base SPY shares, as his analysis assumes that the typical non-covered-call-selling Boglehead was exposed to the same downside risk of being long the underlying.

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hdas
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Re: Covered Calls on Portfolio

Post by hdas » Fri Jan 11, 2019 12:39 pm

Interesting, It's in the wait list of projects.
One of the factors when deciding between holding SPY with ER 0.09% vs VOO with ER 0.04%. I think it's worth the higher expense ratio + liquid options. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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